Saturday

Sunday

Manufacturers brace for jolt to business

Companies refrain from hiring and spending, anticipate budget cuts

Dramatic federal spending cuts set to take effect at the start of next year likely would take the air out of the balloon of U.S. manufacturing's resurgence, industry representatives say. If Congress before the end of 2012 fails to reach a compromise to cut the federal budget, the nation will fall off what's been referred to as the fiscal cliff. That means $109 billion in automatic cuts will go into effect in January, involving an across-the-board $54.5 billion reduction of Pentagon spending in 2013.
“Whatever happens in Washington is something we can't affect other than react to it,” said Gary Swanson, president and CEO of Thermotion LLC, a Mentor-based manufacturer of heater control valves. “You sort of feel like you're on a train, and you're just along for the ride.”
In anticipation of potential budget cuts of $1.2 trillion over the next 10 years as part of the so-called sequestration process, manufacturers are holding off on hiring and on buying new equipment, and instead are waiting to see how the budget saga unfolds.
For companies such as the Bethesda, Md.-based defense contractor Lockheed Martin, which operates a plant in Akron, the situation also likely means layoffs.
Lockheed Martin in July said it could need to send out layoff notices starting this month to all its employees in order to remain in compliance with the federal Worker Adjustment and Retraining Notice Act, which requires that employees receive at least 60 days' notice of potential mass layoffs.
While Lockheed Martin this month issued a statement saying it wouldn't issue layoff notices, it cited as the reason the Department of Defense's guidance that contract changes wouldn't be made for a few months into the year, not that layoffs wouldn't be necessary.
In an Oct. 1 memo to employees, Lockheed Martin chairman and CEO Bob Stevens wrote: “We remain firm in our conviction that the automatic and across-the-board budget reductions under sequestration are ineffective and inefficient public policy that will weaken our civil government operations, damage our national security and adversely impact our industry.”
Major projects such as the F-35 fighter jet, which is part of the government's Joint Strike Fighter program, could be at risk, according to David Silk, partner at SGI Global Business Advisors LLC, a Cleveland-based advisory firm that deals with international economic development groups.
The F-35 project, which is headed by Lockheed Martin, touches 2,876 direct and indirect jobs in Ohio and has an economic impact of $353.7 million in the state, according to Lockheed Martin.
That means the 47 Ohio suppliers to the F-35 project, not to mention Lockheed Martin itself, could see a loss of business. And that's only one project.

Fear of the unknown

The biggest problem with sequestration is the uncertainty involved. There are unknowns about the programs that would be cut and what those cuts would look like.
“By the time it trickles down to us, all we get are more questions than answers,” Thermotion's Mr. Swanson said.
For that reason, Thermotion is delaying any unnecessary spending, including buying equipment and hiring employees, Mr. Swanson said.
The 15-person company serves the aerospace and defense sectors, which represent 10% and 30% of its business, respectively, Mr. Swanson said.
Customers aren't making any long-term commitments, Mr. Swanson said. And, without long-term commitments from customers, companies such as Thermotion can't do long-term planning.
“Everything is just stacking up, waiting for someone in Washington to make a decision,” Mr. Swanson said.
Daniel Sedor Sr., president and CEO of Voss Industries LLC, said there will be “significant hardship out there” for those companies heavily reliant on military work.
Voss, a metal fabricator in Cleveland's Ohio City neighborhood that makes clamps, couplings and ducting for aerospace, defense and industrial clients, hasn't yet seen an impact in business because the contracts on which it's already working haven't been altered.
Mr. Sedor doesn't expect Voss, which employs 335 people, to be severely impacted by sequestration because of the company's diversification.
While he doesn't anticipate any job losses, he did say the cuts could slow Voss' growth plan.
Roger Sustar, CEO of Fredon Corp., a Mentor-based contract specialty machine shop with 86 employees, said with Northeast Ohio so strong in defense manufacturing, sequestration no doubt is going to hurt.
Mr. Sustar said a fear of cuts already is halting innovation among potentially affected manufacturers.
“We could be so much more productive,” Mr. Sustar said. “We're wasting the next four or five months before we decide what's going to happen.”

Long-term impact

Don Styblo, vice president of technology for Valtronic USA Inc., a maker of miniature electronic devices in Solon with roughly 100 employees, is concerned about what sequestration could mean for the future of manufacturing in Ohio.
In cutting financial support to next-generation projects and to research and development, the government could be handicapping the growth of manufacturing, he said.
“They stop the momentum that we've generated in the past few years to bring manufacturing back to the United States and back to Ohio,” Mr. Styblo said.
Manufacturing already is facing a challenge in finding skilled workers to replace aging baby boomers and, if across-the-board cuts are enacted, that pipeline of new workers could become even drier as more students are discouraged from pursuing manufacturing jobs.
For example, at Valtronic, it takes two years for an engineer to become fully trained, Mr. Styblo said, so adding new workers is part of a constant evolution.
Any sequestration-induced slowdown also could hurt the state's status internationally as a center of manufacturing, according to Mr. Silk.
“Ohio is absolutely one of those states that you see around the world constantly,” Mr. Silk said. “It's China. It's Germany. It's Israel. You name it, we are out there. Ohio, as a large manufacturing state, is one of the most significant players on the international scene.”